Kevin Drum’s reaction to Felix Salmon’s Wired piece about the Gaussian Copula—a function measuring default correlation between bonds, and used as the basis for the growth of CDOs, etc.:
There’s just no getting around it: there might have been technical problems with the Gaussian copula function, but even if it had worked the way people thought it did it wouldn’t have mattered. The rating agencies and the sell-side BSDs were just using it as an excuse to pretend that house prices would rise forever anyway. That was a far more fundamental problem than the statistical shortcomings of the formulae they used…When common sense takes a holiday, it turns out, all the math in the world can’t save you.
Tags: Felix Salmon, Gaussian Copula, Kevin Drum, Wired
